Check Fraud Running Rampant

The year 2020 and the coronavirus pandemic brought on what some prosecutors are calling the largest fraud in U.S. history.¹ Illicit actors stole hundreds of billions of dollars in pandemic relief funds, often through the Paycheck Protection Program and state unemployment programs. While the end of pandemic relief programs caused instances of COVID-19 fraud to decline, other types of fraud remain widespread, with one of the most prominent being check fraud.

In 2022, depository institutions across the country filed 459,891 suspicious activity reports (SARs) for check fraud, which was an increase from 249,812 filings in 2021.² This increasing trend is also reflective of filings made by Fifth District member banks.

It appears that smaller banks are bearing the brunt of check fraud when trying to get repaid from larger institutions. According to American Banker, First National Bank of Ottawa attempted to collect nearly two million dollars in 2022 from approximately 250 other banks where bad checks were deposited and returned for fraud.³

Researchers from Georgia State University are looking into how online markets are fueling check fraud. The researchers track the tools and methods that illicit actors share and sell via encrypted platforms, such as WhatsApp and Telegram. They monitor 60 of the platforms in a systematic way and saw the volume of stolen checks for sale grew from fewer than 200 a week in October 2020 to 1,300 a week by October 2021. Since then, that amount has nearly doubled to 2,500. The researchers dove deeper and realized that most of the checks came from USPS mailboxes.⁴

Mail theft has been on the rise since 2017, according to the Postal Police Officers Association. Recent media reports reveal numerous assaults on postal workers. Criminals steal mail and universal mail keys, searching the stolen mail for banking information, access collection boxes and checks.⁵Stolen checks can be altered and re-written for the criminal’s use. Account and routing numbers from the stolen checks can be used to create counterfeit checks.

Another method in which check fraud can occur is through social media platforms. According to the Federal Trade Commission, more than 95,000 people reported about $770 million in losses to fraud initiated on social media platforms in 2021.⁶ Fraudsters may target elderly individuals in a romance scam or individuals with items listed for sale online. They may tell the victim that they are going to send them a check to deposit in their bank account and then have the victim send money back to the fraudster, usually via wire transfer. The victim receives and deposits the fraudulent or counterfeit check, and then sends money to the fraudster before the check can clear. The check is then returned, and the victim suffers a loss. If the victim cannot repay the funds and the account charges off, the bank also faces a loss.

Front line bank employees are the first defense to identifying fraudulent checks and avoiding losses. Some information on understanding check fraud schemes, and potential red flags that may help employees can be found at The Federal Trade Commission’s Consumer Advice Division, American Bankers Association and FDIC Consumer News.

Do you have questions related to check fraud, anti-money laundering or Bank Secrecy Act related issues? Reach out to your Central Point of Contact or connect with us at supervisionoutreach@rich.frb.org.